Interest Rate Forecasting Has Been Tough to Handicap – If You Like IT, Lock It

January 15, 2010

CPI, inflation at the consumer level, came in below expectations at plus .1%. Core inflation, the index that backs out food and energy, rose .1% as well. Most of the meager rise in the overall index came from fuel oil prices which were up 1.1%. Unadjusted consumer inflation now stands at 2.7%. Core inflation is not expected to pose much of a problem given the large amount of slack in the economy. Matter of fact, if the employment picture continues on its current, slow growth or no growth pattern, the slack I’m talking about could be with us for a couple of years.

The New York Fed’s Empire State Manufacturing index was also released, up 11.42 points to 15.92. The better than expected report was driven by soaring new orders, up over 18 points. Shipments rose nearly 13 points as well. The bounce was expected (just not so much) after the steep decline in December. We’ll want to see if this is sustainable or just another inventory rebuild. Next up was Industrial Production which rose .6%. This was on the screws per economists’ consensus. Manufacturing output however fell .1% which is being blamed on a cold, wet December. Last but not lease was the Michigan Sentiment Survey posting a plus .3 reading at 72.5. This “consumer feel good” index reflects a consumer who feels better about the economy going forward yet is still cautious.

Post data, fast money traders bought the market aggressively in both Treasuries and MBS. Jitters over global credit (Greece, Spain, Italy, etc.), concerns about 10% unemployment being with us for most of 2010, and the gang on Capitol hill continuing to tax and spend are all supportive of the interest rate complex (due to investor uncertainty).

Mortgage backs are up 4 to 8/32’s, depending on the note rate while the 10 year note is trading at a yield of 3.67%. We talked about needing a close at or below 3.71%. Looks like we could get it today. The ramifications (given that kind of close) reinforce buy signals on the daily chart and will kick in a new bullish trend signal. It would power us back to the 3.57%-3.62% yield mark, improving mortgage pricing from today’s level. Keep in mind that interest rate forecasting has been tough to handicap, giving us hope for a day only to turn into a one hit wonder. Same rules apply with such a volatile environment; if you like it, lock it. We’ll try to wrap this up later today.

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